There are a number of strategies that can help investors build significant wealth over time on Wall Street. But buying dividend stocks just might be the most lucrative.
In 2013, J.P. Morgan Asset Management released a report that compared the average annual performance of companies that initiated and grew their payouts between 1972 and 2012 to publicly traded companies that didn't pay a dividend over the same time frame. The results showed that dividend-paying stocks delivered an average annual return of 9.5% over 40 years. Meanwhile, the non-dividend payers scraped and clawed their way to a meager 1.6% annualized return over four decades.
Maybe the best thing about dividend stocks is you don't need to invest a boatload of cash to begin reaping the rewards of regular income. If you've got $300 in available capital, which won't be needed for bills or emergencies, this is more than enough to buy the following trio of smart dividend stocks right now.
Annaly Capital Management: 9.9% yield
I've said it before, and I'll say it again: There's not a more exciting ultra-high-yield income opportunity than mortgage real estate investment trust (REIT) Annaly Capital Management (NLY 1.03%). If reinvested, the company's 9.9% payout could double your initial investment in a little over seven years.
Mortgage REITs are companies aiming to borrow money at lower short-term lending rates that'll be used to purchase assets (i.e., mortgage-backed securities) with higher long-term yields. The goal for companies like Annaly Capital Management is to maximize the difference between the yields they're receiving and the average borrowing rate. This difference is known as net interest margin.
One of the best things about the mortgage REIT industry is there are few surprises. There are clear positive and negative catalysts that allow investors to make well-informed decisions. For example, a flattening yield curve or a Federal Reserve that's making big changes to its monetary policy tends to bode poorly for Annaly. By comparison, a steepening yield curve coupled with slow, telegraphed monetary policy changes by the Fed is often a recipe for profit expansion for Annaly and mortgage REITs. With the U.S. economy bouncing back from a recession, the latter scenario is considerably more likely.
Additionally, if you're worried about another recession, Annaly has you covered. Of the $69 billion in securities held in its portfolio as of June 30, $66.5 billion were agency mortgage-backed securities. Agency assets are backed by the federal government in the event of a default. While this extra protection does lower the yield Annaly receives, it also allows the company to utilize leverage to boost its profit potential.
There is no such thing as a "sure stock" on Wall Street. But having paid out more than $20 billion in dividend income since its inception in 1997, and averaging a roughly 10% yield annually over two decades, Anally Capital Management is the smartest ultra-high-yield stock investors can buy.
Innovative Industrial Properties: 2.5% yield
Another exceptionally smart stock investors can buy right now is Innovative Industrial Properties (IIPR 1.40%). Whereas Annaly Capital Management is all about the dividend income and offers modest share price appreciation potential, Innovative Industrial Properties, or IIP for short, is all about significant share price upside and a modest yield that masks a rapidly growing payout.
IIP is a cannabis-focused REIT. It acquires medical marijuana cultivation and processing facilities in legalized U.S. states. As of last week, the company held 75 properties in its asset portfolio covering 7 million square feet of leasable space in 19 states. The most important figure here is that 100% of its 7 million square feet is leased, with a weighted-average lease length of 16.6 years. The point being that IIP can count on consistent cash flow for more than a decade to come.
Even though acquisitions are IIP's primary source of growth, the company does offer modest organic revenue catalysts. Every year, IIP passes along inflationary rental hikes to its tenants, as well as collecting a 1.5% property management fee that's based on the annual rental rate.
One of the company's biggest growth drivers has been the lack of cannabis banking reform at the congressional level. As long as marijuana remains a Schedule I drug, access to basic financial services for pot companies will be hit and miss. IIP steps in to resolve financing issues with its sale-leaseback program. As the name describes, IIP acquires facilities for cash and immediately leases these assets back to the seller. These deals provide much needed cash for cannabis companies and land IIP long-term tenants.
With the U.S. weed industry fully capable of more than $40 billion in annual sales by mid-decade, Innovative Industrial Properties should remain a high-growth company. Tack on a quarterly dividend that's grown 900% in four years, and you have the recipe for a true moneymaker.
Verizon Communications: 4.7% yield
A third smart dividend stock investors can put $300 to work in right now is telecom giant Verizon (VZ -0.19%). This is the perfect stock for conservative investors who loathe volatility but still want to outpace inflation.
While Verizon can accurately be described as a "boring" stock, it nevertheless has two catalysts that could drive modest organic growth over the next five years.
To begin with, the rollout of 5G wireless infrastructure is going to put some pep in Verizon's step. It's been a decade since wireless download speeds have been dramatically improved. With 5G upgrades hitting major cities and moving into rural U.S. communities, we're liable to see a multiyear device upgrade cycle that leads to increased data consumption. Data happens to be Verizon's key margin driver for its wireless segment.
It's also worth pointing out that consumer loyalty is about as strong as it's ever been. Consolidation in the wireless space, coupled with the aforementioned download speed upgrades, led to a low postpaid retail churn of just 0.94% in the June-ended quarter. This is an operating segment that prides itself on cash flow predictability, and historically low churn rates will only help that cause.
The other catalyst for Verizon is its in-home 5G broadband push. Earlier this year, the company outlaid big bucks to acquire 5G mid-band spectrum. The expectation is that Verizon's broadband services could be in up to 30 million households by the end of 2023. In-home broadband provides consistent cash flow and gives Verizon the opportunity to bundle high-margin services.
Verizon's high-growth days may be long gone, but its 4.7% yield and modest organic growth potential provide ample opportunity for income investors to grow their nest egg.